Run on Numbers: Inside the GEPFs annual report
In October last year, the Minister of Finance, Enoch Godongwana, presented the annual report for the Government Employees Pension Fund (GEPF) for the year to March 2022.
The GEPF is not only the largest pension fund in Africa but is also housed in a defined benefit structure, which means it is underwritten by the government, and by extension the taxpayer.
The GEPF assets grew from R127 billion in 1996 to R2. 3 trillion as of March 2022, and it’s a significant contingent liability on the State’s books, which almost no politician and very few economists have the experience or expertise to unpack properly.
There is some fine print in the latest financials worth noting: “This means that contingency reserves are not allowed to put a fund into a deficit and a fund would only be required to hold the level of contingency reserves supported by its assets. The full recommended contingency reserves amounted to R892m. The fund’s assets can support holding 20.9% of the full contingency reserves.”
The report is quite extensive and covers all areas of importance for an institution of its size and the important role it plays in our economy. More than 1.265 million active members from more than 325 government departments and about 473 312 pensioners and other beneficiaries have their life savings tied up in this retirement fund, which even has its own legislation, which prescribes the kind of benefits GEPF must pay and how money must be invested.
These rules are spelt out in the Government Employees Pension Law 21 of 1996, as amended, which is referred to as the GEP Law. The aim of this law and the rules that guide the Board of Trustees in governing the Fund is to ensure that GEPF puts the interests of its members first.
We took a closer look at matters that stood out in the GEPF annual report as well as the GEPF statutory valuation report at the end of the reporting period.
1. The most impressive point always taken is the sheer size of the GEPF as is illustrated by the graph below. The compound growth rate over the period is not as high as what may be expected, being a mere 6,75%. The picture is bleaker if one strips out the net inflow of new contributions of members over this time which was a considerable amount of R 674 billion.
2. The health of the fund can be examined in many ways, but the net cash flow picture is a good place to start. The annual report shows that funds under management is cash positive on a yearly basis as the Fund income from new contributions plus investment income exceeds payments to beneficiaries. However, keep in mind there are currently 499 726 pensions paid compared to 479 483 in the 2020/2021 financial year and the number of active members decreased from 1 265 406 in 2020/2021 to 1 261 363. There are only 2.5 active members per pensioner. And that is a pretty tight rope to tread.
3. The performance and risk profile of a fund depends much on its asset allocation policy. The table below shows the different weights allocated to the main asset class categories. With the downgrading of South Africa by international rating agencies the risks associated with domestic government bonds - also guaranteed by the national government - make the huge allocation less than ideal. There is a lot of debt in our economy from the central government institutions down to State-owned enterprises like Eskom, Transnet, the SA Post Office, SABC and SAA, many of which have been bailed out numerous times by the taxpayer. We also have most of our municipalities on the brink of bankruptcy, and struggling to repay debt.
4. The grey-listing of SA by the Financial Action Task Force (FATF) will also have a detrimental impact on the GEPFs investment portfolio. GEPF is required to invest 90% of its assets in South Africa, and as such remains the single largest investor in the JSE. That is a huge concentration risk to fathom in an economy that is barely growing and a stock market that has been trading sideways for years. It is noteworthy that regarding equities, foreign assets are included but when it gets to bills and bonds, they are all local. With a long-term depreciating rand some foreign bonds may have proved a worthwhile bet despite their low running yield. Come the redemption date there could have been some substantial upsides once such foreign currencies are reverted and brought back in rands.
When it gets to the GEPF investment choices, that is all on the Public Investment Corporation (PIC). The GEPF is their biggest client, but they also manage the assets of the Unemployment Insurance Fund and the Compensation Funds. It is always interesting to check how much the PIC’s investment philosophy deviates from the norm. Keenly watched is what percentage of a specific company the PIC holds, and another position closely followed is how the PIC top 10 or 15 largest companies compare with that listed on the JSE and the relative weighting of such companies relative to the total market capitalisation of the JSE.
From the above the MTN, holding is overweight relative to the criteria for what percentage of an individual company the PIC own and that the PIC holding is far from the company weighting on the JSE. The same applies to FirstRand, Sasol Capitec, and Impala. It is not easy to keep the initial intended balance in a portfolio. An example is the steep drop in the price of Prosus and Naspers two years ago. Since then both companies have recovered sharply and Prosus is up by 61% and Naspers with 92%. Sasol has suffered the same fate although it is nowhere near its previous all-time peak price.
During the investigations of the impropriety at the PIC, a 995-page report was produced and inter alia the due processes at the PIC were considered. The report stated, “The information that has come to light during the (MPATI) Commission hearings when compared to the above process, indicates that due process was not followed.”
GEPF and PIC are two different entities, but Treasury don’t always openly discuss the concept of the separation of these powers? The fund might be the PIC’s biggest client, but it is not their only one.
It is quite astonishing that after all those witnesses and changes to the Board of Trustees and executive management over the last few years, and the sharp and extensive criticism directed at the PIC, the GEPF does not go look for another or even an additional asset manager. Take manage their affairs, especially during the period when the PIC had no official mandate from the GEPF to be just that. That was only finalised at the end of October.
It also shouldn’t sit well with civil servants, that the former head of the GEPF, now runs the PIC. He was also the acting commissioner at the FSCA for a while, the regulator that has oversight over the rest of the private retirement fund industry, under the Pension Funds Act, but the Conduct authority now enjoys oversight to the biggest and most prominent fund of them all.
It is not about Mr Abel Sithole’s capabilities, it is just not the right thing to do.
* Kruger is an independent analyst
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